The Patient Protection and Affordable Care Act got off to a rough start vis-à-vis the information technology glitches that plagued its marketplace exchanges during the first couple months of 2013, but insurance enrollment through the health reform law has made quite a comeback in a relatively short period of time.
After enrolling a meager 365,000 people through the first two months of the first enrollment period (Oct. 1, 2013 -- Dec. 1, 2013), participation in Obamacare, as the PPACA is more commonly known, surged to practically 12 million in calendar year 2015.
But just because Obamacare appears to be back on track doesn't in any way mean that questions surrounding the program have been put to rest.
One of the main uncertainties that continues to plague Obamacare is premium pricing. For instance, insurers, hospitals, and primary care providers still consider the law something of a "work in progress." Since many of the law's facets are brand new, including the individual mandate that requires consumers to purchase health insurance or face a penalty, and the fact that insurers can no longer turn away consumers for having preexisting conditions, insurers have some ongoing adapting to do.
Unfortunately, it looks as If some consumers could be in for quite the wake-up call in 2016 in select states.
Premium rates could skyrocket in these four states
With proposed premium pricing submitted to each state's insurance commissioner two weeks ago, leading insurers in four states asked for nothing short of astronomical premium price hikes.
Based on data from The Wall Street Journal, New Mexico's leading health provider, Health Care Service Corp., a non-investor-owned licensee of the Blue Cross Blue Shield Association, proposed a nearly 52% average increase in premiums for 2016. Following suit were three other state health insurance leaders: BlueCross BlueShield of Tennessee, CareFirst BlueCross BlueShield of Maryland, and Moda Health in Oregon, which requested average premium hikes of 36%, 30%, and 25%, respectively, from their states' insurance commissioners.
Following relatively tame premium increases in 2015, these requests are terrifying for the American consumer -- particularly for the middle-class consumer with an average income just above 400% of the federal poverty line, or roughly $46,000, who narrowly miss out on qualifying for some form of advanced premium tax subsidy.
The rational for a huge premium hike
You might wonder what would cause insurers to request such a hefty increase in their premiums. In short, every one of them cited higher medical costs incurred from people newly enrolled in health insurance via Obamacare.
One of the long-term effects of Obamacare is to encourage insured consumers to regularly visit their primary care physician so potentially dangerous diseases and disorders can be detected early. One of the keys to keeping long-term medical cost inflation from spiking is for consumers to take this step and avoid developing costly chronic conditions later in life. While this could be great news for health-benefits providers 10 or 20 years from now, the immediate effect appears to be a jump in medical expenses for these providers as consumers visit their doctor.
Insurers could also be experiencing what is known as adverse selection. With the barriers to enrollment essentially torn down and health-benefits providers no longer able to turn away consumers because they have a preexisting condition, the sickest individuals are likely to be the first and most eager to enroll. Conversely, some of the healthiest young adults who are needed to offset the higher costs of medical care to the sickest Obamacare participants simply aren't enrolling.
Another point made by insurers is that the rise of specialty drugs is hampering the cost effectiveness of providing medical care. Personalized medicine and targeted therapies are all the rage among drug developers because they reduce competition and give drug developers incredible pricing power. But this is not necessarily good news for insurers or the consumer when it comes time to pay.
For example, Gilead Sciences' (NASDAQ:GILD) Harvoni and Sovaldi, two treatments that provide an effective cure for hepatitis C, cost $94,500 and $84,000 on a wholesale level, respectively, for a standard 12-week treatment. It's true that added competition and recently forged long-term deals have reduced these costs by up to 46% in select cases, but that doesn't make these therapies exactly "cheap" for insurers or consumers.
Finally, insurers have had time to simply digest a little more than a year's worth of medical utilization rates from new enrollees. The four insurers note that many new enrollees have tended to be older and suffer from multiple chronic conditions.
It may not be all bad
There's another side to these astronomical price hikes as well.
The market-leading insurers in Washington and Vermont, for example, requested respective price hikes of 9.6% and 8.4%, which is on par with their requests last year. The insurance leaders in Indiana, Connecticut, and Maine also recommended more modest increases of 3.8%, 2%, and just above 0%, respectively. While there are a few notable example of huge premium hikes, the majority of increases are more limited.
We should also consider that these are merely the first proposals from these leading insurers. State insurance comissioners will require some seriously convincing explanations for any increase of more than 10%. These initial proposed rates rarely stick, and the final premium is usually somewhere between what the insurer initially proposed and what the insurance commissioner would prefer. In other words, the final premium increases in New Mexico, Tennessee, Maryland, and Oregon are likely to land below the insurers' initial proposals.
Lastly, this data only accounts for the market leaders from roughly a dozen states. We still have data from more than three dozen other states to consider, as well as the pricing action of the insurers that maintain the second-, third-, and fourth-largest market share in all 50 states. While I'm not saying the requests from these four insurers aren't eye-opening, this is also a little bit of data cherry-picking when we only have a snippet of information at our disposal.
Here's what you should really be watching
Instead of getting wrapped up in the "could be, might be" chatter associated with initial premium proposals, consumers and healthcare investors would be wiser to pay attention to the upcoming Supreme Court decision on King v. Burwell.
This court case will determine whether the federal government, which manages the Healthcare.gov federal insurance marketplace, can pay out subsidies to enrollees on behalf of the 37 states that it currently has within its network. If the plaintiffs' case against those subsidies is upheld, it could have devastating consequences on the long-term survival of Obamacare, and it would have a most decisive impact on premium rates around the country in the following year.
Personally, I continue to suggest investors exercise caution in the coming weeks until we have that Supreme Court verdict in hand.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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